Bumpy switch to 777X at Boeing

EVERETT — The Boeing Co.’s 777 has been one of commercial aviation’s most successful airplanes. But the company has been struggling to sell it since unveiling a successor — the 777X — late last year.

Right now, the company’s Everett plant churns out 100 of the popular airplanes a year — an historically high rate for a wide-body jetliner. At that pace, existing orders will keep the line busy until about January 2017, three years shy of the 777X’s scheduled entry into service in 2020.

Boeing continues to be upbeat about getting enough orders for existing 777 models to bridge the gap at the current production rate, but aerospace analysts think that is a bridge too far.

The 777 faces stiff competition — including two long-range Airbus models — as well as an uncertain air-cargo market.

Boeing will likely have to slow production to keep the line running, analysts say.

The Chicago-based company has only received a trickle of orders since formally unveiling the 777X in November. Customers could wait for the new airplane or choose competing products that are not near the end of their production run.

Boeing executives have repeatedly said they are confident about bridging the gap. But the company hasn’t ruled out slowing the production rate.

“It’s our plan to stay where we’re at and have a successful transition,” said Randy Tinseth, vice president and head of marketing for Renton-based Boeing Commercial Airplanes. “At the same time, we always monitor the market” to make sure supply and demand are balanced.

The company wants a comfortable transition from current 777 models — the -200ER, -200LR, -300ER and a freighter — to the successor 777X, similar to a plan for the overlap of current 737 NG models and the 737 MAX, which is scheduled to enter service in 2017, Tinseth said.

That is a tough act to replicate, though.

When Boeing started taking orders for the 737 MAX in November 2011, it already had enough backlogged orders for in-production 737 NG models to keep the assembly line in Renton busy past the MAX’s first delivery.

At the time, it had about 2,200 orders for the 737 NG. Accounting for production rate increases, that backlog alone would keep the Renton line busy through about April 2018.

That does not include orders for the MAX, which will be assembled on the same line.

By April 2012, Boeing had chalked up roughly 400 more orders for the 737 NG. Based on the production rate at the time — 35 airplanes per month — that represented more than 11 months of work.

Contrast that to the 777: Only eight orders have been placed for current models since Boeing started taking orders for the 777X last November. That is less than a month of work at the current rate.

To be sure, orders for expensive wide-body jetliners can come in drabs and spurts. But Boeing hasn’t booked so few 777 orders in the first five months of a year since 2004, when it only received orders for two airplanes.

“People are comparing this to the 737 MAX, but it’s a totally different market,” said Richard Aboulafia, an aerospace analyst with the Teal Group in Fairfax, Virginia.

Customers shopping for a narrow-body airliner didn’t really have other options. Both Airbus Group and Boeing said they were re-engining their products — the A320 family and the 737 — around the same time.

That is not true with the 777, Aboulafia said.

Depending on their needs, airlines could opt for airplanes that are slightly smaller but available sooner — Airbus’ A330 and A350, or Boeing’s 787-10. Less likely, but possible, some carriers could go for larger aircraft, such as Airbus’ A380 or Boeing’s 747-8.

“There are a lot of options that don’t involve taking the last of the current model series,” which will lose its resale, or “residual,” value more quickly, Aboulafia said.

Residual value is increasingly important as more and more airlines use third-party financing to pay for airplane purchases. If the borrowing airline can’t pay off its debt, the lender wants to be able to sell or lease the financed airplane.

Boeing is more optimistic about in-production 777s holding their value.

“We’re competing for the capital of our customers — what’s a better investment?” Tinseth said. “If you have an airplane that makes money for airlines, it’ll hold its value.”

“Only once you cross that point where the new airplane starts to become the dominant airplane in the market, that’s when you see the downward pressure on residual value,” he said.

Boeing expects to sell the 777-300ER everywhere, with the most demand coming from the growing Middle East and Asia-Pacific markets.

It also forecasts a growing cargo market, which will generate orders for 777 freighters.

Regardless, Boeing will have to work for sales.

“As you work through the transition, you see pricing pressure, there’s no question about it,” Tinseth said.

The aerospace giant could spur demand by pairing orders with the 777X, cutting the sticker price and offering trade-in value for customers’ older 777 models, which could be converted into freighters.

But analysts expect that Boeing ultimately will have to slow production to keep the line running. With the 777X line ramping up, a slowdown likely wouldn’t result in layoffs in Everett, Aboulafia said.

Wells Fargo analysts recently forecast that “Boeing will have to cut the 777 build rate — with an announcement possible as early as year end.”

They forecast an initial step-down to seven planes a month, with a further cut to five per month if demand softens.

Wells Fargo was “being generous with Boeing,” Aboulafia said.

He and other analysts, such as Scott Hamilton of Issaquah-based Leeham Co., expect steeper rate cuts from the airplane maker.